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Merger Directive

Taxation of restructuring operations in the European Union

On 17 October 2003 the Commission adopted a proposal (COM(2003) 613) amending Council Directive 90/434/EEC on a common system of taxation applicable to mergers, divisions, transfer of assets and exchanges of shares concerning companies of different Member State (see press release IP/03/1418).

A modified version of that proposal was subsequently adopted by Council on 17 February 2005 , as Directive 2005/19/EC (see press release IP/05/193 and Official Journal L 58, p. 19 of 4 March 2005 ). See also the press release issued at the time of political agreement on the modified version (IP/04/1446).

The Merger Directive 90/434/EEC of 23 July 1990 provides for the deferred taxation of capital gains arising from cross-frontier company restructuring carried out in the form of mergers, divisions, transfers of assets or exchanges of shares. Taxation of the capital gain is deferred until a later disposal of the assets.

Directive 2005/19/EC

The main amendments introduced by Directive 2005/19/EC are the following:

  • The Merger Directive currently applies to companies adopting one of the legal forms mentioned in a list annexed to it. Directive 2005/ /EC adds new legal entities to this list. The benefits of the Merger Directive are thus extended to a greater number of legal entities, including the European Company (Council Regulation (EC) 2157/2001 and Council Directive 2001/86/EC) which may be created as of October 2004 (see press release IP/01/1376) and the European Co-operative Society (Council Regulation (EC) 1435/2003 and Council Directive 2003/72/EC) which may be created from 2006 (see press release IP/03/1071).
  • The current list of companies covered by the Merger Directive contains entities that are subject to corporate tax in their Member States of residence. However, in the case of some of the new entities that have been added to the list other Member States simultaneously tax their resident taxpayers which have an interest in those entities, so-called 'transparent entities'. The same tax situation can also apply to the shareholders of companies entering into the transactions covered by the Directive. Directive 2005/19/EC introduces specific provisions (new Articles 4(2) and 8(3)) to ensure that the benefits of the Merger Directive are available even in these cases, subject to certain exceptions which are set out in the new Article 10a.
  • The coverage of a new type of transactions: a special division known as a "split off " (new Article 2(b)(a)). This transaction is a partial division. The splitting company is not dissolved and continues to exist. It transfers part of its assets and liabilities, constituting one or more branches of activity, to another company. In exchange, the receiving company issues securities representing its capital. These securities are transferred to the shareholders of the transferring company.
  • Directive 2005/19/EC provides for capital gains exemption when the receiving company holds shares in the transferring company. The holding threshold required to enjoy this exemption is now set consistently with that of the Parent-Subsidiary Directive. This threshold will be lowered in stages from 25% to 10% (Article 7(2)), in line with the amendments to the Parent-Subsidiary Directive introduced by Council Directive 2003/123/EC.
  • Directive 2005/19/EC introduces specific provisions providing relief on the conversion of branches into subsidiaries (Article 10).
  • The Directive introduces rules governing the transfer of the registered office of the European Company (SE). The title of the Merger Directive is modified to include a reference to this operation (Article 1) and the latter is defined in the text of the Directive (Article 2(j)).
    The applicable tax regime is found under a new Title IVb, Articles 10b to 10d: the SE transferring its registered office will enjoy tax deferral on capital gains where its assets remain connected with a permanent establishment situated in the Member State from which it is moving. The shareholders of the SE should not be liable to tax on this occasion.